As the events of the last 2 years have palpably demonstrated, the global economy is now critically inter-dependent thanks to the a congruence for capital driven enterprise, the information enablement of IT, and of course the median of massive intermediary financial markets. It is inter-woven to a degree of depth and speed unlike any other period in history, one which has surprised even the most insightful of supposed luminaries.
2 years into the global contraction and, as ever, the financial newswires and video talking-heads typically consist of Bull vs Bear sentiments, perhaps a consequence toward the endemic reality that in such times bulls tend to over-emphasize the impact of any immediate good-news reports whilst bears tend to view the longer-term macro-fundamentals of the system Thus we typically see a general underlying downward trend in most asset classes (but most prevalently stocks) with overlying volatility created by 'better than expected' released company results, released economic indicator figures or governmental announcements that produces short-run up-tick rallies.
Thus as ever, given that the market consists of a great number of participants each wielding very different levels of actionable power, the market is an intrinsic 'living oxymoron', the amalgam of contrasting viewpoints and sentiment.
For the Bulls it is a case of the Bears being masters of their own doom, confidence being everything; and for the Bears the experiential acumen that statistics and rhetoric (whether company-specific, agency-specific or government-specific) must be treated with caution, recognising the possible bias of origination. It may be over-zealous to quote Disreali's "lies, damned lies and statistics", but such distrust of apparent exactitude has proven historically accurate in times of economic uncertainty and change.
In 'normal' times the market (analysts, traders & investors) must contend with looking at the 'surface' of the global economic framework, since when the economic machinery is purring, all that needs to be viewed and judged are the everyday trades of the market, whether Bonds or Stocks or FX or T-Bills/Gilts, or the more obscure Derivative Placements, or the more sophisticated calculations for Arbitrage. Thus in 'normal' times there is only a need to appreciate the 'Lateral' inter-connectivity.
But today the ongoing need is to better understand the 'Vertical' inter-connectivity, that is an understanding for the inner-workings of the global trading machine itself, given the nature of the systemic breakdown and the accordant diagnosis and prognosis from multi-constituent experts.
Simplistically, the Bears recognise the size and complexity of the problem, whilst the (speculating?) Bulls see the moments for opportunity in specific sectors or regions.
But if we look at the picture simplistically yet holistically there is still a large discontinuity between theory and optimism. The mention of 'green shoots' and up-beat growth sentiment still seems very premature given that the creation of solid economic foundations is still fundamentally lacking.
There's much talk of the growth momentum coming from 'Main St' and not Wall St given the more positive earnings reports of late, but that 'positivity' is undoubtedly a reflection of well-managed individual companies conserving cash and buoying balance sheets. These companies have had to maintain their momentum given either their inability to rely on banking credit and unwillingness to draw on any available credit-lines. Thus they individually may be seen to be weathering the storm, but that is a consequence of their own 'weather-protection' ability, and that should not be mistaken as reflective of the broader picture.
The fact is that the very heart of the global economic machine - the international banking system - is still very fragile due to the lack of confidence regards levels of individual and collective write-downs, and indeed the size of losses that need to be recognized and attributed. Until this faulty economic foundation-stone is properly unearthed and dealt with there can be no return to normality.
That of course is what governments the world over have been trying to do, both individually and acting together under the G20 umbrella. As ever policy fractures have emerged, the likes of the Obama administration using TARP and TALP to immediately re-capitalise the primary banks via directly injected public funding, versus the likes of Merkel's administration seeking a longer-term 20 year write-down of the present-day toxic assets - seeking a latter-day asset price rebound - so as not to burden public taxation.
As of today, though primary pricing indicators highlight a slight upturn in inflation (and so apparently growth) this anathema is really a result of general re-alignment of previous over-capacity across most sectors, from energy (eg oil price) to retail. But that is in reality a misleading phenomena as sectors re-adjusted inventory and trading levels.
Ultimately today, instead of the normative 2-D play between (consumptive & productive) society and the financial markets, there is a 5-D play between:
1. Society,
2. the Financial Markets
3. International Central Banks
4. International Government Agencies (ie G20)
5. Global Funding Agencies (esp IMF, World Bank);
This of course increases the complexity enormously, with macro-economic issues taking precedence, and importantly during this crisis, the latter of these groups - the new-world orchestrators - trying to re-mould themselves or create spin-off entities to undertake their remit to solve the global problem.
It has oft been mentioned that the over-credit driven, over-stretched, and some say effectively bankrupt West must look to the enormous savings levels of the East for effectively FDI and re-capitalisation at both retail & investment banking levels and importantly regards investment in Western industries. Although the West (US and UK particularly) have instigated large stimulus packages to boost domestic consumption, hoping to use the debatable 'accumulator' theorem, part of such a re-starter motor's expectancies would be to inspire confidence for FDI from the Middle East, Asia, and of course specifically China. [NB Jon Huntsman's nomination as Sino-US Ambassador].
But whilst commodity and industrial-based SWFs from the likes of the GCC, N. Korea and Singapore will look fervently for Western opportunities, the real issue of accessing Asia's massive savings base - tor re-set the global funds imbalance - presently looks quite remote.
For many Asian countries with agrarian roots still in the public psyche, combined with a lack of social safety-nets and the recent history of the 1997 'Tiger Crash', the desire to build and preserve savings is still very much apparent. Even for the Generation X's and Yer's, though they have spent throughout the good times, their parent's and grandparent's advice has still been heard. Thus with rising unemployment and a re-patriation for many back to their home towns, they will seek to utilise their funds personally and locally. This perhaps especially evident in China where a 'feast and famine' past has created a self-dependent, entrepreneurial spirit.
To this long-time socio-graphic principle we can now add the possible results of a recent important financial occurrence - Bank of America seeking to divest 30% of its current share-holding in China Construction Bank Corp (moving from 16.7% to 11% ownership). As a consequence of seeking the monies for its own re-capitalisation (as part of its recent government stress-test) could the Chinese authorities view the move as a retrograde, almost defensive step, inspired by Washington? Especially acute after the 'mutual collectivity' seen in London for the G20. Or indeed, is the divestment welcomed by Beijing to help de-couple a well positioned CCBC from a less than healthy BoA? But given CCBC's recent stock rally on the back of more upbeat China economy sentiment relative to its own stimulus package, it seems almost ironic that BoA must sell at what could be below-par to swap a strong long-term asset for short-term liquidity - but "USA Inc" needs it to do so.
As for "USA Inc" reports suggest that its banking sector has written down about two-thirds of the outstanding toxic assets that weigh on balance sheets, which compares against Europe's one-third to half; as we see with Germany's reticence. Both approaches obviously have arguable pros and cons, with the US wanting to clear out the garbage on Wall St to place it in a better position sooner.
Clearing the decks will obviously assist in due course, allowing the banking sector to both inspire and exploit the re-bound, but at present that re-bound still looks some way off; especially so without the level of Asian FDI assistance previously hoped for.
Domestically the WSJ reports that 52 economists expect the recession to officially end by Q309, but taking years for the economy to recover fully. As we see it, the prime economic catalysts of Main St, Wall St and the National Budget/PSBR are still very weak:
Main St -
- unemployment to reach 10.5% by year-end (not 9.7% of averaged forecasts)
- Q209 GDP contraction of 2.2% (not 1.6% of avg'd f'casts)
- large cross-sector industrial re-structuring leading to 'leaning' of ops and delayed job creation
- improved personal savings levels deferring esp big-ticket purchases
- the 'kinetic energy' of stimulus will take time to be felt given local budget planning time-frames.
- consumer reticence, especially given housing stock wind-down
Wall St -
- 2/3 toxic write-down needs broader confirmation
- bank stress-tests seen as not credible by academic quarters (esp Rubini)
- this creates greater latter-day discomfort - false foundations
- personal savings improve capitalisation ratios
- but still evidence of apparent 'good' (standalone) banks vs 'bad (gov't loan) banks
National Budget/PSBR -
- record budget deficit
- inability to pull levers now at 0% and QE measures
- TARP & TALP need to be seen to work
- stimulus plans must be managed to create the 'accumulator effect'.
- a general expectation that Congress will not be asked for funds again
- major changes to normal budget allocation (eg Defense spending criteria)
- could leave administration open to criticism if further homeland terrorism
- which would in turn demand unfortunately maintained heavy PSBR.
Thus the economic fundamentals demonstrate that there is a 'new norm' for the US almost starting afresh regards value creation, and it will be one that is set to unfurl slowly at first then moving more quickly for quite possibly much of the decade to come. investment-auto-motives doesn't enjoy being so bearish but has to agree with the likes of Gary Shilling, that we are entering a new period.
[That sentiment seemingly paralleled by Berkshire Hathaway's long-term plays on 251 "underpriced" monoline insurance company derivative instruments, suggesting/expecting a far improved default environment 15-20 years down the road].
It is one which, as we've said before, must be build from scratch and from a re-casting of the country's industrial base in order to create new productivity and innate value. The economy must re-inflate itself based on sound fundamentals and solid business principles, not from the historic credit-pull that created the consumer and financial markets misplaced euphoria that ultimately ended in a bubble and so gave rise to today's unwelcome diaspora.
Times of fundamental transition by their very nature demand structural change across all sectors, and that of course means M&A opportunities for Advisory, Underwriting and event-driven equity trading. So whilst the markets themselves may be smaller in the number of participants given the disfavour of the general public (and so reduce what have often been over-indulged CapEx values), it does mean that a smaller number of professional participants (as active 'protagonists' and passive 'riders') be able to pick-over the bones and lean-meat of global companies.
But before even that step of the economic re-build story can happen, the very working of Wall St need to be re-cast, tested as sound and utilised as the M&A orchestrator and multi-sector business model arbiter. We are still some way from that point, as the structure of banking itself undergoes its gradual but hopefully powerful transformation.
That process includes, as a first step, the re-moulding of 'Core Role National Agencies' that overlook banking standards and regulation; including the structure of: National Treasury Departments, National Central Banks (esp The Fed & BoE), regulatory bodies (eg the SEC and FSA) and at a higher plane the IMF and World Bank.
All are presently prescribing new-era financial framework templates and guaging their own executive roles. Although simultaneous to Wall Street's re-invention, this must lead slightly ahead to provide cohesive, globally inter-related direction. So it is in itself a lengthy process that may take time, time which will affect US and global industries and society. But it must be done soundly to effect robust, long-term change.
Now more than ever the criticality of economic inter-relationships is key, and whilst 'tormented' investors presently feel frustration from the lack of market traction, better to overhaul the global financial transmission system than experience unwieldy self-destructive 'kangaroo-hops' from fundamentally broken financial machinery.
And by that score, the serendipity of General Motors plays-out as a useful metaphor.
